Fitch Ratings has downgraded the ratings on the series A and B fixed rate notes on Thunderbolt II Aircraft Lease Limited (TBOLT II) and Thunderbolt III Aircraft Lease Limited (TBOLT III).

The Rating Outlook on each series remains Negative.

RATING ACTIONS

Entity / Debt

Rating

Prior

Thunderbolt II Aircraft Lease Limited

Series A 886065AA9

LT

BBB-sf

Downgrade

BBBsf

Series B 886065AB7

LT

Bsf

Downgrade

BBsf

Thunderbolt III Aircraft Lease Limited

A 88607AAA7

LT

A-sf

Downgrade

Asf

B 88607AAB5

LT

BBsf

Downgrade

BBBsf

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The rating actions reflect ongoing pressure and poor financial conditions of the airline lessee credits backing the leases in each transaction pool and continued downward pressure on aircraft values. The actions also reflect Fitch's updated assumptions and stresses and resulting impairments to modeled cash flows and coverage levels. The prior transaction reviews were in November 2020.

The Outlook remains Negative on all series of notes, reflecting Fitch's base case expectation for the structures to withstand immediate- and near-term stresses at the updated assumptions and stressed scenarios commensurate with their respective ratings. Continued global travel restrictions driven by the pandemic and the subsequent airline recovery, including ongoing regional flareups and potential for and occurrence of new virus variants, resulted in continued delays in recovery of the airline industry.

This remains a credit negative for these aircraft ABS transactions and airlines globally remain under pressure despite the recent opening up of borders regionally and pick-up in air travel globally. This could lead to additional near-term lease deferrals, airline defaults and bankruptcies, along with lower aircraft demand and value impairments. These negative factors could manifest in the transactions, resulting in lower cash flows and pressure on ratings in the next 6-12 months.

Fitch updated its rating assumptions for both rated and non-rated airlines. This update drove the rating actions along with updated aircraft values and modeled cash flows. Recessionary timing was assumed to start immediately, consistent with Fitch's prior review. This scenario stresses airline credits, asset values and lease rates while incurring remarketing and repossession costs and downtime at each relevant rating stress level.

Air Lease Corporation (ALC, BBB/Stable) and certain third-parties are the sellers of the initial assets, and ALC acts as servicer for both transactions. Fitch deems ALC an adequate servicer for these transactions based on their capabilities and prior experience, including prior experience servicing ABS.

KEY RATING DRIVERS

Deteriorating Airline Lessee Credit:

The credit profiles of the airline lessees in the pools have remained under stress due to the ongoing coronavirus-related impact on all global airlines in 2021. The proportion of TBOLT II lessees assumed at a 'CCC' Issuer Default Rate (IDR) and below were marginally increased at 73.3% versus 70.5% in the prior review. For TBOLT III, the 'CCC' and below airlines increased to 85.1% versus 81.8% in the prior review.

The assumptions are reflective of these airlines' ongoing credit profiles and fleets in the current operating environment, due to the continued coronavirus-related impact on the sector. Fitch has updated assumptions for any publicly rated airlines in the pool with ratings that have shifted.

Asset Quality and Appraised Pool Value:

Both pools feature mostly liquid narrowbody (NB) aircraft, which Fitch views positively. Widebody (WB) aircraft total 11.5% in TBOLT II, and 5.9% in TBOLT III. There continues to be elevated uncertainty and ongoing pressure on aircraft market values (MV) and about how the current environment will impact near-term lease maturities.

The appraisers for both transactions include Acumen Appraisals, Inc. and IBA Group Ltd. (IBA). Collateral Verifications, LLC (CV) is the third appraiser for TBOLT II, and Morten Beyer & Agnew Inc. (mba) for TBOLT III. TBOLT II was last appraised in December 2020 and TBOLT III in June 2021. The transaction document value is $465.6 million for TBOLT II and $423.2 million for TBOLT III.

Fitch utilized conservative asset values for both transactions as there is continued pressure and weaker market values for certain aircraft variants, particularly WBs. Fitch utilized the average excluding highest value (AEH) of the maintenance-adjusted base values (MABVs) for NBs for both transactions. For WB aircraft in TBOLT II, minimum MA market values (MV) with an additional 5% haircut were utilized, and TBOLT III applied the average MAMV. This resulted in modeled values of $418.3 million for TBOLT II and $387.0 million for TBOLT III, approximately 10% and 9% haircuts down from the transaction value.

Transaction Performance:

Lease collections have fluctuated in 2021 but remained relatively rangebound from the beginning of the year for both transactions and since the prior review. As of the October 2021 servicing report, TBOLT II received $4.3 million in basic rent compared to average monthly collections of $3.6 million over the past six months. TBOLT III received $4.7 million in basic rent compared to an average monthly receipt of $4.0 million over the last six months.

Loan-to-values (LTVs) across the TBOLT III notes have been fairly stable based on the updated Fitch LTVs for this review versus the prior, while the TBOLT II LTVs have marginally increased across all note classes.

All notes continue to receive interest payments to date. As of the October 2021 report, TBOLT II had sufficient cash to pay a portion of the class A principal since the August 2021 report date, but no principal was paid for 12 months prior. Since the prior TBOLT III review in late 2020, there has been virtually no principal payments over the past 19 months back to March 2020 when the pandemic broke, aside from periodic payments in 2021 when only a portion of the class A principal was paid. The debt-service coverage ratios (DSCRs) in both transactions remain tripped below the respective cash trap and early amortization event triggers.

Fitch Modeling Assumptions:

Nearly all servicer-driven assumptions are consistent from closing for each transaction. These include costs and certain downtime assumptions relating to aircraft repossessions and remarketing, terms of new leases, and extension terms.

For any leases whose maturities are up in two years or whose lessee credit ratings are 'CC' or 'D', Fitch assumed an additional three-month downtime for NBs and six months for WBs, on top of lessor-specific remarketing downtime assumptions, to account for potential remarketing challenges in placing this aircraft with a new lessee in the current distressed environment.

Near-term lease maturities are a credit negative for the transactions given the challenging environment, and selling aircraft (particularly older aircraft) may result in highly stressed, lower values, and Fitch took these factors into account in its analysis.

With the significant reduction in air travel, maintenance revenue and costs will be impacted and are likely to decline due to airline lessee credit issues and grounded aircraft. Maintenance revenues were reduced by 50% over the next immediate 12 months, and such missed payments were assumed to be recouped in the following 12 months thereafter.

Maintenance costs over the immediate next six months were assumed to be incurred as reported. Costs in the following months were reduced by 50% and assumed to increase straight line to 100% over a 12-month period. Any deferred costs were incurred in the following 12 months. Further, maintenance costs were adjusted on TBOLT II in the medium term based on a comparison of the maintenance look-forward schedule in the servicer reports and the historical transaction maintenance costs. The expectation of timing of maintenance events continues to shift as a result of reduced utilization of global fleets.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Down: Base Assumptions with Shorter Useful Life:

The Negative Outlooks on all series of notes reflect the potential for further negative rating actions due to concerns over the ultimate impact of the coronavirus pandemic, the resulting concerns associated with airline performance and aircraft values and other assumptions across the aviation industry due to the severe decline in travel and grounding of airlines. Due to the correlation between global economic conditions and the airline industry, the ratings can be affected by the strength of the macro-environment over the remaining terms of these transactions.

Mid to end-of-life aircraft are typically sold when the aircraft reaches an average age of 18-20 years. However, ALC's strategy differs from other lessors who focus on mid-to end of life aircraft and hold onto aircraft longer. In this scenario, Fitch explored the cash flow decline if the useful life assumption was adjusted to 20 years down from 25 years. Under this scenario, TBOLT II experiences a decline of $70.1 million in net cash flow at the 'Asf' rating category. Under this scenario, the class A would be able to pass at the 'Bsf' scenario and class B does not pass under the 'Bsf' scenario. TBOLT III experiences a decline of $67.1 million in net cash flow at the 'Asf' rating category. Under this scenario, both class A and B are able to pass at the 'Bsf' scenario.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Up: Base Assumptions with Transaction Reported Value

The aircraft ABS sector has a rating cap of 'Asf'. All subordinate tranches carry one category of ratings lower than the senior tranche and below the ratings at close. However, if the assets in this pool display stronger asset values than Fitch modeled and therefore stronger lease collections than Fitch's stressed scenarios, the transaction could perform better than expected.

In this scenario, Fitch increased the model value up to the average MABV, the transaction document values as of the October 2021 report. On TBOLT II, the class A passes at the 'BBBsf' rating and class B passes at the 'BBsf' rating. On TBOLT III, class A is able to pass at the 'Asf' rating and class B passes at the 'BBBsf' rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

APPLICABLE CRITERIA

Aircraft Operating Lease ABS Rating Criteria (pub. 09 Aug 2021) (including rating assumption sensitivity)

Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 20 Sep 2021)

Global Structured Finance Rating Criteria (pub. 26 Oct 2021) (including rating assumption sensitivity)

Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 04 Nov 2021)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Aircraft Lease Liability Model, v1.0.0 (1)

Aircraft Lease Simulator Model, v1.6.1 (1)

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy

ENDORSEMENT STATUS

Thunderbolt II Aircraft Lease Limited 	EU Endorsed, UK Endorsed
Thunderbolt III Aircraft Lease Limited 	EU Endorsed, UK Endorsed

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